Short-term and day-trading Forex trading has exploded with the increase in data access and widespread use of Forex trading software. Now, even the average trader can conduct real-time analysis of the market. “Day trading” refers to the practice of both buying and selling a share or commodity in a single day. Although accessible to everyone, it is not the right financial move for everyone, and this article will explain why.
The key to Forex day trading’s popularity is instant gratification. Traders, and people in general, increasingly want results now. In fact, they want results not just now, but ten minutes ago! Day trading offers precisely those kind of instant results.
Many traders like day trading because it provides instantaneous feedback. They know whether they have made or lost money on a trade within hours—or within minutes—whereas buy-and-hold traders find out if they succeeded only in the long term. The instant results can be incredibly gratifying.
Day trading also requires a minimal investment. Forex traders may have lower capital requirements, which allows people to commit less money up front. Without the barrier of high capital requirements, the doors are open to more people to engage in day trading than ever before.
There are risks, however, as the government warns many traders and potential traders. The overwhelming plurality of traders should not ignore these warnings about the riskiness of day trading — markets go up, but they also go down. Success will require dedication and experience, and beginners should wade cautiously into these dangerous waters. On the other hand, many Forex day traders are very, very successful. Although they are the exception, the American dream is to be exceptional, and day trading is simply one more area in which people compete and sometimes excel.
Another potential downside from day trading, besides risk, is that it increases transaction costs. Brokerages charge customers each time they buy and sell, and because day traders both buy and sell multiple times every day, they pay much more money in brokerage transaction costs. And day trader typically aims for a much smaller profit per-trade than those investing for the long term, so these fees can be significant. The range of prices in a single day will almost always be smaller than over many years, so ,of course, the profit margin is lower.
Finally, remember that day trading requires patience and exacting research. The smaller size of profits per trade and smaller fluctuations in price from trading in a single day leaves little room for error. If a day trader aims for a five-percent profit, they cannot afford to get in too early or too late — especially because the aforementioned fees will eat into that profit. Longer term traders will aim for much bigger profits over a much longer time period, and therefore can be less precise with entries and exits. But not day traders.
This article should not discourage the adventurous trader from engaging in Forex day trading. But let it be a warning of what lies ahead. The foolish, greedy, and ill-prepared will note fare well in Forex day trading. The market is an arena which requires discipline, patience, wit, and courage. Prudent traders will first tackle a Forex demo account, so that they may practice trading without having any skin in the game.
